Texas State Appeals Court Rules Stop-Loss Insurance Premiums Cannot Be Taxed As Health Insurance Revenue

On Friday, in the Third District of the Texas State Courts of Appeal, an appellate panel ruled that stop-loss insurance premiums could not be taxed like health insurance premiums in the State of Texas in an opinion authored by Chief Justice Jeff Rose.

Blue Cross Blue Shield (BCBS) paid over $3,000,000 in taxes to the State of Texas on premiums collected from stop-loss policies. BCBS subsequently sued the State for a refund, proffering that the taxes paid were a result of the Texas Department of Insurance (TDI) misreading the state tax code to incorrectly label stop-loss insurance as health insurance. However, BCBS argued that while Texas tax statutes previously defined health insurance to include stop-loss policies, the legislature repealed that definition in 2003.

The court explained that under Texas law, all revenue received from health insurance premiums paid a “premium tax” (PT) and a “maintenance tax” (MT). 

The PT applied to insurance plans that received premiums in order to directly cover risks of individuals, as health insurance policies do with medical risks of insurance customers. However, stop-loss insurance policies, the court distinguished, do not cover medical risks or costs for anyone, but rather allow an employer who is directly paying medical expenses for employees to have a cap on how much can be spent on expenses in a calendar year, thereby limiting the economic loss to employers with employees experiencing unexpected medical expenses. 

The three-judge panel held that while stop-loss policies are related tangentially to health insurance policies, the stop-loss policies cover the risk of the employer, who in turn cover the risk of employees. As such, BCBS cannot be taxed for PT. 

The court then moved to whether BCBS must pay MT on its stop-loss policies’ premiums. Maintenance taxes are taxes that reimburse TDI for the cost of regulating the health insurance industry. One must pay MT if the premiums at issue involve the “writing (of) health insurance.” As stop-loss insurance, the court concluded,  merely provided economic protection for BCBS via a cap on annual medical expenses, it was solely the employer — not the plaintiff— involved in any writing of health insurance. As such, the appellate panel stated, BCBS cannot be taxed for MT or PT on stop-loss policy premiums, and the case against them should be dismissed. 

BCBS was represented by Ryan Law.